Treasuries Jump on Small Gain in NAPM
Tuesday May 1, 12:52 pm Eastern Time
By Eric Burroughs
<<NEW YORK (Reuters) - U.S. Treasuries rose on Tuesday after a report showed the struggling manufacturing sector was stabilizing but still mired in a nine month recession, supporting expectations for more Federal Reserve interest rate cuts later this month.
The National Association of Purchasing Management (NAPM) said its monthly gauge of industrial activity rose to 43.2 in April from 43.1 in March, but below expectations for 43.8. Any reading below 50 indicates contracting growth.
It was the third straight month the ailing U.S. manufacturing activity improved, providing some evidence of stabilization in that sector.
But the small gains in the NAPM suggested that the Fed still has plenty of room to cut rates, analysts said, even after a surprising acceleration in economic growth during the first three months of the year had dampened hopes for more deep rate cuts.
Market players had feared the NAPM report could show a much bigger increased after the jump in economic activity seen in first quarter gross domestic product (GDP).
``While it does show is that perhaps we've reached a bottom in manufacturing, obviously there's still long way to go before the nation's factories get up and running at full strength,'' said Kevin Flanagan, fixed-income strategist at Morgan Stanley.
``It's going to take time, and the (bond) market is probably relieved to some extent because it's a figure that failed to show any new momentum.''
The government said on Friday that GDP, which measures all economic activity in the country, rose at a 2.0 percent annual pace in the first quarter, much higher than expected and double the pace from the fourth quarter last year.
Bond investors see the pickup in economic growth as reducing the need for more aggressive Federal Reserve interest rate cuts as well as possibly portending future inflation pressures later in the year -- both negative for bonds.
The Fed has shaved 2.00 percentage points from its overnight bank lending rate to 4.5 percent to make credit more easily available and give beleaguered economic growth a shot in the arm. The Fed's next policy meeting is in two weeks on May 15.
``The Fed is going to continue to ease,'' said John Canavan, Treasury market strategist at Stone & McCarthy Research Associates in Princeton, N.J.
According to futures contracts on the federal funds rate, the market fully expects the central bank to cut rates by at least another 25 basis points -- a quarter of a percentage point -- at the next meeting.
But the odds that the market places on an additional 25 basis points of easing have fluctuated, with many investors looking to a key employment report on Friday for a clearer signal.
The Fed's four previous rate cuts this year have each been by 50 basis points, or half a percentage point.
Two-year notes (US2YT-RR) rose 4/32 to 99-17/32, pushing their yield, which moves opposite to price, down to 4.24 percent at 12:30 p.m. (1630 GMT). Five-year notes (US5YT-RR) rose 6/32 to 103-21/32, yielding 4.84 percent.
Benchmark 10-year notes (US10YT-RR) rose 15/32 to 97-29/32, yielding 5.27 percent. Thirty-year bonds (US30YT-RR) rose 29/32 to 95-3/32, yielding 5.72 percent.
Treasuries shrugged off a Commerce Department report that said U.S. construction spending rose 1.3 percent in March, led by increases in non-residential building activity, much higher than the 0.3 percent gain consensus forecast. It was the fifth straight month construction spending has increased.
Throughout the day, automakers will report their results in April. Solid auto sales so far this year have helped alleviate the inventory buildup among manufacturers and have helped the economy weather the downturn in overall activity.>> |
